Volcker blames global markets for Asian mayhem

Volcker blames global markets for Asian mayhem

HONG KONG (Reuters): Weak banks, crony capitalism, excessive borrowing and inflated currencies have all borne their share of blame for the Asian financial crisis.

But on Monday, one of the world's most prominent former central bankers pointed the finger at a different culprit -- financial markets themselves.

"I would submit to you that there is every indication that what we face is not a localized problem in...Southeast Asia...but the latest manifestation of a more systemic crisis of global capitalism -- and it is one that deserves our attention," Paul Volcker, chairman of the U.S. Federal Reserve from 1979 to 1987, told an audience in Hong Kong.

Speaking to the Hong Kong/U.S. Economic Cooperation Committee, Volcker said financial market instability was nothing new.

In fact, Southeast Asia's recent affliction and past crises in Latin America, Scandinavia and the Czech Republic confirmed the susceptibility of all economies, good and bad, to an erratic global financial system out of whack with fundamentals, he said.

Any exchange rate system that generated a 60 percent swing in the yen-dollar rate over three years was clearly failing to reflect economic fundamentals smoothly and accurately, he said.

The yen has fallen to about 132.5 to the U.S. dollar on Monday from 80 in 1995.

"If the exchange rate system is that far out of keeping with underlying, economic, tangible reality it is no wonder we have occasional crises that overwhelm smaller countries," he said.

"My hope is that the constructive result of this crisis will indeed be a serious look at a financial system that does seem to me to need repair," Volcker said.

Some analysts have argued that over a 10-year period, Asia built its economic system around a strong yen.

When the yen started to weaken, Asian currencies tied to the U.S. dollar quickly became over-valued, causing economic distortions that attracted the attention of currency speculators.

But Volcker said it was instructive to keep the size of Southeast Asia's economies in mind.

The total banking system in Thailand, Indonesia or Argentina roughly matched the size of a medium-sized, regional bank in the United States, he said.

"What I think we are seeing here is a manifestation of the volatility of financial markets coming up against small emerging economies that did not used to participate in these markets," he said, adding that fund managers seeking performance now moved many billions of dollars through markets, often on a whim.

Despite the risks that this volatility posed to smaller nations, Volcker argued that only greater openness provided a solution.

For smaller nations, tying up with huge multinationals was one sure-fire way of withstanding the whip-saw moves of global capital, he said.

Volcker said he also expected to see further currency integration between smaller countries and larger neighbors, with currencies anchored along regional lines, as in Europe.